Saving for retirement is something that is very important but knowing the right things to invest in to ensure the money grows can be difficult. A diversified portfolio is an excellent way to invest for the future, and this can be accessed through a single exchange-traded fund (ETF).
What Is an ETF?
An ETF is a security sold by a broker, and there are many different funds available that all have various upside and downside. The ETF is a collection of different investments all bundled into one. This is designed to lower risk because the amount of money is split between multiple different investments rather than just one. For example, the Standard and Poor’s 500 (S&P 500) is based on the 500 largest companies in the United States and owning a single stock in each of these companies would be very expensive. However, buying an ETF that follows the S&P 500 provides diversification without the hassle of buying and expense of buying numerous stocks, according to the leading consumer finance blog NerdWallet.
How Does an ETF Work
The ETF works by directly following the ups and downs of each investment bundled into the ETF. The main benefit of this is that it is highly unlikely all investments in the ETF will rise or fall in value at the same time. Having them all bundled together diversifies your portfolio to help ensure that the profits mitigate losses, with the hope of gains over the long term.
How to Buy and ETF
There are more than 2,000 different ETFs sold by brokerage firms in the United States alone so that there are likely competing products offered by different brokerage firms in the same ETF class. ETFs can be bought and sold online through an online broker just like a stock. Once you decide what ETF you would like to buy, find the section on your broker’s website for trading ETFs and stocks. Type in the symbol of the ETF you would like to buy and select the number of shares. Select the order type and which account you want to pay. Once complete, you now have your own ETF.
ETF Considerations
With so many different choices available, you need to consider some factors when deciding what ETF is right for you. Administrative fees, commission fees, volume, holdings, performance and trading price are all important things to consider when making your decision. Many websites have comparison tools to help you make this decision.
Avoiding Losses
Due to the volatility of the stock market, it is wise to make sure you have a safety net in place if the price starts to fall rapidly, says the personal finance website Kiplinger. This safety net comes in the form of a stop-order or stop-limit. A stop-order automatically sells your ETF if it drops below a certain price that you set. Once the price hits the level you determine, it will automatically go up for sale on the market. However, this does not guarantee you will get that price. The stop-limit will also place the ETF up for sale if it goes below a certain price, but the sale will not be completed unless the exact amount the stop-limit was set at is paid. These two methods can help protect your ETF investment from huge losses if the market takes a sharp downturn.
